Yahoo! takes two-pronged approach to digital music

Yahoo! is planning to launch its own online music service later this year, despite its $160m purchase of Musicmatch announced this week, according to music industry sources.

Since late last year, Yahoo! has been developing its own music player software, which will be underpinned by a subscription and download service provided by MusicNet, sources familiar with the plan said.

Yahoo! still plans to launch that home-built package by the fourth quarter of this year, despite its recent purchase of Musicmatch, those sources said. The web giant is likely to run the two services side by side for some time before ultimately drawing on Musicmatch's technology and moving Musicmatch's subscribers into the Yahoo! fold, sources said.

After more than a year of staying largely out of the digital music sales business, Yahoo!'s double-barreled strategy could help shoot it quickly to a top role in a business increasingly populated by giants such as Microsoft and Sony.

A Yahoo! representative on Friday said the company had no comment on its pending music plans. But David Goldberg, who runs Yahoo!'s Launch digital music subsidiary, hinted at larger ambitions on Tuesday, after the Musicmatch announcement. "We're making a big investment," he said at that time. "We want to be the major player in digital music."

Yahoo! is starting from a position well behind rivals. Apple Computer's iTunes store launched a year and a half ago and has already sold more than $100m worth of 99-cent songs. Napster and RealNetworks have developed small, but growing, audiences for their subscription music services, while more recent entrants Sony and Microsoft are still finding their feet.

A multipronged strategy could help Yahoo! make up that gap by letting it approach separate audiences and use Musicmatch's customers as a launching pad.

The Musicmatch buy brings Yahoo! a well-regarded piece of jukebox software, a music download store similar to Apple's iTunes, a premium net radio service with more than 160,000 subscribers, and a recently launched subscription service similar to RealNetworks' Rhapsody.

Yahoo! and Musicmatch began negotiating acquisition terms in February this year. Even then, the web portal had started working on building its own application, with the help of technology and engineers acquired in its purchase of a small music software company called Mediacode.

Those engineers, who helped build the Winamp player program now owned by AOL, have helped create a player application that is tightly linked to Yahoo!'s own technology. For months, they have also been working to link that technology with the music download store and subscription-based services provided by MusicNet, which also counts AOL and Virgin Digital among its customers.

Industry experts said Yahoo! might have decided to purchase Musicmatch for several reasons. The 8-year-old music company has a subscriber base that is likely more sophisticated about digital music than Yahoo!'s broader consumer audience, some said.

Those longtime online music users may be attracted to the high-margin digital music subscription service, which Yahoo! sees as a core part of its business, sources said.

Musicmatch's technology itself, such as its recently added ability to let a listener share songs with a friend, was likely also a factor in the deal. Finally, the purchase keeps Musicmatch out of the hands of other large companies, which could become significant rivals to Yahoo!, sources said.

A recent court ruling, which dismissed some patent infringement charges by digital music company Gracenote against Musicmatch, may also have helped clear the financial picture for the acquisition.

The Musicmatch acquisition brought Yahoo! the third-largest audience for online music, according to internet research firm ComScore Media Metrix. As of August, Yahoo!'s Launch ranked top with 14 million unique users, followed by AOL Music at 13 million and Musicmatch at 5.8 million. MSN Music came in fourth with 4.3 million, Napster owner Roxio had 2.1 million unique users, and RealNetworks' Listen accounted for 1.8 million.

Analysts said a plan to invest in parallel services would be a risky one for Yahoo!, however.

"They've got money, and that's their biggest asset," said Michael McGuire, an analyst at GartnerG2. "It is early on in the marketplace, but building that is going to be very hard and very expensive to market."

As of 30 June, Yahoo! had close to $2.6bn in cash on hand.

Other Yahoo! services are likely to benefit from a focus on music. In particular, Yahoo! plans to beef up its IM service with more interactive music features that enable people to listen to one another's playlists, according to sources familiar with the initiative.

The sources would not say whether these IM features would launch when the homegrown player is introduced. The current version of Yahoo! Messenger lets people listen to music radio stations programmed by Launch.

The idea of weaving music into IM is not new. When Microsoft launched its MSN Music store last month, executives earmarked instant messaging as a place to listen to and buy music. MSN's corporate vice president Yusuf Mehdi said the idea is to eventually let people share playlists through their IM window and then buy songs off those lists.

A Microsoft representative declined to elaborate on those plans and would not offer a time frame for the launch of such a feature.

John Borland writes for CNET News.com